Question

Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 11.3% per year thereafter until the 5th year. Thereafter, growth will level off at 2.2% per year. According to the dividend discount model, what is the value of a share of Gillette stock if the firm's equity cost of capital is 7.5%?

The value of Gillette's stock is $?

Answer 1

Annual Dividend 1 year from now(D1) = $0.65

Expected Growth rate until year 5 i.e., from year 2nd to year 5th (g) = 11.3% per year

Growth rate thereafter(g1) = 2.2% per year forever

Equity cost of capital(ke) = 7.5%

Calculating the Current Price of Stock using dividend discount model:-

P0 = 0.605+0.626+0.648+0.671+0.695+13.398

P0 = $16.64

So, The value of​ Gillette's stock is $16.64